John Paulson (IndyMac + CIT )= FDIC Disaster

Let's do some arithmetic.

Add this:

FDIC is backstopping the mortgage losses at IndyMac Bank (now OneWest Bank), and IndyMac Bank is hell-bent on foreclosing the properties, as in:
Is FDIC Killing Short Sales? (Active Rain, September 09)

To this:

Creditors of CIT Group is mulling the merger of CIT with IndyMac Bank, as in:
John Paulson mulls CIT and IndyMac merger: report (9/29/09, Reuters via Yahoo Finance)

Then multiply it by the common denominator:

John Paulson, a hedge fund billionaire

And the product is:

Potential huge profit for Paulson and his co-investors in IndyMac and CIT, and potential huge loss to taxpayers (because FDIC is already broke).

John Paulson's firm is one of the large creditors to CIT Group; it is also one of the private investors who are behind OneWest Bank that bought IndyMac from FDIC back in April this year. IndyMac Bank's press release lists the following entities as OneWest Bank investors:

Steven Mnuchin (former Goldman Sachs exec)
entities advised by

• J.C. Flowers & Co. LLC,
• Paulson & Co.,
• MSD Capital, L.P.,
• Stone Point Capital LLC,
• SSP Offshore LLC and
• SILAR MCF-I LLC

OneWest bank president Terry Laughlin is a former Merrill-Lynch, Fleetboston, and Mellon Bank executive.

IndyMac-CIT merger talk is simply a rumor at this point, may or may not be true. CIT share jumped on the news on Tuesday, surging 31% to close at $2.20. Then, this news broke after hours, and the stock took a nose-dive on Wednesday, plunging 45% to $1.16:

CIT near plan to turn over co to bondholders: sources
(9/29/09 Reuters via Yahoo Finance)

"NEW YORK (Reuters) - CIT Group Inc (NYSE:CIT - News) is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.

"CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.

"The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.

"If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history."

As structured, the current offer will practically hand over the entire company to the bondholders. I have a feeling that the bond holders will refuse, and force the company to go through Chapter 11 so that they can pick apart CIT's assets. Then, the bondholders, including John Paulson, will discuss the merger of thus restructured CIT and IndyMac (now OneWest), combining troubled mortgages and troubled commercial loans to create a potent money making machine for them. Fully backstopped by FDIC (i.e. taxpayers).

The Treasury Department, FDIC, and the Federal Reserve have all refused to help CIT, the largest lender in the United States that lends to small and mid-sized businesses for more than 100 years. Like they've done many times since last March when Bear Stearns went down, they are picking who's to survive and who's to die.

October 1st is the deadline for CIT to present a restructuring plan to its lenders.

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